On Saturday 10 January 2015, Regulation (EU) 1215/2012 of 12 December 2012 (the Judgments Regulation) came into force. Its effect, from that date, is to change jurisdiction rules which apply directly to litigation in the courts of all 28 member states of the European Union (EU). For those based outside the EU, but doing business within it, changes to the rules on jurisdiction agreements and related actions in third (non-EU) states will be particularly relevant. The Regulation also clarifies the relationship between litigation in member states and arbitration, although certain issues arising under the old rules have still not been addressed.
The Judgments Regulation is the key European instrument on jurisdiction and enforcement issues in civil and commercial matters. It applies directly to cases before the courts of all 28 EU member states, and supersedes national jurisdiction rules.
The default jurisdiction rule is that defendants should be sued in the courts of their domicile (Article 4). In some cases, however, an alternative jurisdiction exists. For example:
- In contract claims, a defendant may also be sued in the courts of the place of performance (Article 7(1)(a)).
- In tort claims, proceedings may also be brought in the place where the harmful events occurred or may occur (Article 7(3)).
If there are multiple defendants, and the claims against them are closely connected, a claimant may bring an action in the place where any one of them is domiciled (Article 8(1)). As regards third party proceedings, a claimant may bring claims in the court seised of the original proceedings (Article 8(2)).
Under Article 25, if parties to an agreement choose to resolve their disputes in the court of a member state, then that choice will be respected and treated as an exclusive jurisdiction unless the parties state otherwise.
Under the old regime, this rule only applied if one of the parties was domiciled in the EU, but that has now been dropped. A jurisdiction clause will fall within the scope of Article 25 even if none of the parties are domiciled in a member state. This helpfully removes the need for a detailed, and potentially costly, enquiry as to the domicile of the parties, and of individuals in particular.
Two new rules should also be noted:
- If the “substantive” validity of a jurisdiction clause is challenged, then the law of the member state identified in the jurisdiction clause will govern the question (Article 25(1)) i.e. if the jurisdiction agreement refers to the Courts of England and Wales, the “substantive” validity of the agreement will be determined under English law. What is not clear, however, is:
- how this rule should be applied where more than one national court is identified or there is a hybrid clause;
- what is meant by “substantive” validity. Could a defect as to form or misdescription of the identified court, for example, be ignored? or
- whether the parties can agree that some other law should govern the issue.
- The principle of separability is now recognised, so that even if the agreement containing the jurisdiction clause is alleged to be void, the jurisdiction clause itself may still be valid (Article 25(5)). This practical approach reduces the risk of abuse and largely mirrors the English common law position.
These changes are welcome, but the Judgments Regulation still remains silent on other key questions, in particular:
- whether a jurisdiction clause in favour of a third (non-EU) state should be respected. There is no uniform position across Europe. The EU and United States have both signed the Hague Convention on Choice of Courts Agreements of 30 June 2005, but since this has only been ratified by Mexico, it is unlikely to provide any solution in the short to medium-term; and
- whether asymmetric jurisdiction clauses, often used in lending and capital markets agreements to grant maximum flexibility e.g. to lenders, survive. There is conflicting case law in England and France on this issue1.
Lis Pendens Rules
1. Litigation only before courts of Member States
Where the same action is brought in two or more member states, the “first in time” rule usually applies, i.e. the court first seised will determine if it has jurisdiction, and any other court should await that determination before proceeding (Article 29).
Under the old regime, this was open to abuse; however, with potential defendants bringing pre-emptive claims for declarations of non-liability in places such as Italy and Greece, even in breach of a jurisdiction clause2, to delay final resolution of the claims against them. The new rules seek to deal with the “Italian torpedo” by freeing a court chosen in an exclusive jurisdiction clause to determine whether it has jurisdiction regardless of whether it was first seised; and if it does so, then any other court must stay its own proceedings unless the chosen court declares that it has no jurisdiction (Article 31(2)).
Despite this change, certain practical difficulties remain:
- the rule does not apply to non-exclusive jurisdiction agreements or to any hybrid or asymmetrical clause which is not treated as being “exclusive”; the Italian torpedo can still be used effectively in such cases;
- there is no uniform test or guidance as to the meaning of “exclusivity” for non-chosen courts; if they apply their own national law to the issue, differing results may arise;
- whilst the chosen court can now proceed, the new rule does nothing to speed up any decision on jurisdiction, as the Judgments Regulation does not impose any deadline within which member state courts should determine jurisdictional issues.
2. Litigation involving a third (non-EU) state (Articles 33 and 34)
Jurisdictional rules at the European (as opposed to national) level have historically avoided regulation of circumstances where proceedings are already ongoing in a third state, where the dispute falls within the scope of a third state jurisdictional clause or where the dispute is about e.g. property rights or validity of corporate actions3 in a third state. This leads to uncertainty, however, and curious results - no more so than in the infamous decision of the Court of Justice of the EU in Owusu, which held that a member state court seised on the basis of a defendant’s domicile could not decline jurisdiction in favour of a third state, even if the third state was a more appropriate forum.
The Judgments Regulation now takes tentative steps in this area by introducing a new international lis pendens rule. Articles 33 and 34 confer a discretion on the courts of member states (on application by a party or of their own motion) to stay proceedings to take account of actions involving the same cause of action and parties, or related proceedings, pending in a third (non-EU) state. The discretion is not unfettered, however. In particular:
- proceedings in the third (non-EU) state must have been started first;
- for related proceedings, it must be expedient to hear the actions together to avoid irreconcilable judgments;
- the judgment of the third (non-EU) state must be capable of recognition and enforcement in the member state which is considering whether to grant a stay; and
- a stay must be “necessary for the proper administration of justice.” Whilst Recital 244 gives some guidance as to what this means, it is clearly open to (wide) interpretation.
Equally, the new international lis pendens rule is not absolute:
- Whilst the courts of a member state may dismiss their own proceedings if a related action in a third (non-EU) state has already concluded and resulted in a judgment which can be recognised or enforced in the member state, they are not obliged to do so (Article 34(3)).
- Member state courts can still continue proceedings notwithstanding the new rule if circumstances change e.g. a risk of irreconcilable judgments falls away for some reason.
Ultimately, the threshold test for the new stay seems very high, and there is likely to be litigation as to what some of these new provisions mean. If there is a third (non-EU) state jurisdiction clause, the courts of member states risk sanctioning a breach of contract if the high bar is not reached. This does little to promote comity.
The Arbitration Exclusion
The Judgments Regulation states, succinctly, that arbitration is excluded from its scope (Article 1(2)(d)).
Under the previous rules, the precise boundaries between the jurisdictions of member state courts to act in support of arbitration were unclear. In West Tankers, an agreement contained an arbitration clause with a seat in England, but one of the parties instead started proceedings before the Italian courts. The defendant to the Italian claim asked the English Court to grant an anti-suit injunction to stop the Italian action, but ultimately failed. The Court of Justice of the EU held that the Italian court had jurisdiction over the damages claim that had been brought, and could therefore also assume jurisdiction over the associated issue of whether or not the arbitration clause, related to the damages claim, was valid. In effect, this decision gave parties to arbitration agreements licence to act abusively, by bringing substantive litigation before the courts of the member state most likely to accept a challenge to the arbitration clause, and whose judgment on the merits would then be enforceable throughout the EU.
Some of these negative effects are now overturned by Recital 12 to the Judgments Regulation. It states expressly that:
- the Judgments Regulation does not prevent the courts of member states from referring parties to arbitration, from staying or dismissing court proceedings in favour of arbitration, or from examining whether the arbitration clause cannot be relied upon for any reason under national law;
- similarly, the Judgments Regulation does not apply to actions or ancillary proceedings related to the establishment of the tribunal, powers of the arbitrators, conduct of an arbitration, or action to annul, review, appeal against or enforce an award;
- a ruling by the courts of a member state concerning whether an arbitration clause is valid, operative or capable of being performed is not subject to the rules of recognition and enforcement under the Judgments Regulation, so will not be automatically binding in other member states; but
- if the courts of a member state do find that an arbitration clause is invalid, their subsequent judgment on the merits will be so enforceable. If an arbitration nevertheless continues, this is likely to cause tension with Article 73(2), however, which accords precedence to the New York Convention over the Regulation itself. Other member states would presumably give effect to any arbitration award rendered in the matter, rather than the substantive decision of the member state court, but this runs counter to the principles of recognition/enforcement of judgments under the Regulation and is nowhere expressly stated.
The Judgments Regulation is a significant and important piece of EU legislation, and most of its changes improve upon the old rules. The removal of incentives to deploy the “Italian torpedo” where the parties have agreed an exclusive jurisdiction clause is particularly welcome. There remain, however, significant lacuna - particularly regarding third state matters - and the introduction of the new international lis pendens rule may lead to increased tactical skirmishes before its scope is more finally settled by the Court of Justice of the EU.